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SUBJECT: CHINA/TELECOM: NEW MINISTRY OF INFORMATION INDUSTRIES
- Summary: One of the more significant Chinese
government reforms announced in March was the creation of
a new Ministry of Information Industries (MII) formed by
merging the Ministry of Posts and Telecommunications
(MPT), the Ministry of Electronics Industry (MEI), and
parts of the Ministry of Radio, Film and Television, China
Aerospace Industry Corporation and China Aviation Industry
Corporation. On March 31, the State Council officially
announced the top leadership and the mission of the new
Ministry: the MII Minister will be Wu Jichuan, former
Minister of MPT; there are five vice ministers: two former
MPT vice ministers and three former MEI vice ministers.
The announcement added that MII will work closely with the
State Economic and Trade Commission in setting policies
for China's information industry, including policies
regarding introduction of foreign investment and
technologies and strategic development plans.
- In an interview April 3, Minister Wu indicated
that reorganization will not lead to additional opening to
foreign companies. In addition, on April 8, the State
Council announced on August 8 that the "State Council
Informatization Leading Group Office" and "Radio
Regulatory Commission" would be abolished and their
functions taken over by MII. End summary.
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The New Lineup
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- Vice Premier Wu Bangguo took over the MPT
portfolio last year from Zou Jiahua (who retired) and will
retain overall responsibility for the MII within the State
Council. The top MII leadership is balanced between
former officials from MPT and MEI. (MPT is closely linked
to the former monopoly telecom service provider, China
Telecom, and MEI is closely linked to the state-owned
second telecom service provider China Telecom; this could
lead to rivalry between the ministries for control of
telecoms policy.) The five MII vice ministers are:
Executive Vice Minister Liu Jianfeng (MEI), Lu XinKui
(MEI), Qu Weizhi (MEI), Yang Xianzu (MPT), and Zhou
Deqiang (MPT). Former MPT Vice Minister Lin Jinquan will
continue to head China Telecom, but will give up his
status as a government official in order to achieve a more
complete separation of regulations from operators. None
of the other agencies absorbed by MII are represented in
the top leadership. Additional details of the
reorganization are still emerging: The State Council
announced on August 8 that the "State Council
Informatization Leading Group Office," which had served as
an interagency coordinating group, and "Radio Regulatory
Commission," which had been responsible for radio
frequency allocations, would be abolished and their
functions absorbed by MII. Former MEI Minister Hu Qili
now heads the "909" semiconductor project in Shanghai.
- The new MII leadership is currently deciding the
organizational structure of the new ministry, the
portfolios of each vice minister, how many departments the
ministry will have, and the staffing and responsibilities
of each department. Decisions on the new organizational
structure are proceeding from the top down and are now at
the director general level; the process is expected to
take a minimum of a few months to conclude. Reforms at
MII are likely to be completed before reforms at other
ministries because of the relatively favorable
circumstances of the information industries. High growth
rates in the industry and expanded authority for the
regulators make restructuring less painful. According to
industry sources MII is being treated as a showcase for
government reform.
- The Chinese central government has traditionally
had relatively little power over budgets and personnel
appointments at the provincial level. However, provincial
governments mirror the central government in
organizational structure. Observers estimate it will be
at least another year before the ministerial reforms are
implemented at the provincial and local levels-- in part
because reforms must first be completed at the central
level to establish a model to follow. Premier Zhu has
publicly stated that the structural reforms at all levels
should be completed within three years.
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Less monopoly, but not market access for foreign companies
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- In an interview in the April 3 "Southern Weekend"
Minister Wu said China will open to foreign participation
its Telecom services market "gradually, after certain
conditions are met"-- a statement virtually identical to
ones he made as Minister of Post and Telecommunications.
In past statements, Wu had explained that the conditions
to be met include promulgation of a comprehensive telecom
law and the development of domestic companies capable of
competing with the large foreign telecom companies. He
estimated it could be 20 years before this latter
condition was met.
- Telecom industry observers believe the government
reorganization will not likely include any additional
market opening measures, and, in the short run, could
actually lead to active protection for newly formed state
corporations. Some industry sources expect closer
scrutiny of "gray area" operations of foreign companies
that had been tolerated when the regulatory authority was
unified.
- China Unicom in the past purchased equipment from
foreign companies rather than from the manufacturing
enterprises associated with its rival China telecom, while
China Telecom purchased equipment from state-owned
manufacturing operations associated with MPT. Now that
the two companies' patron ministries MPT and MEI have
merged, some industry observers believe there may be
additional pressure on China Unicom to purchase equipment
from domestic companies. Of the two carriers, only China
Unicom had been willing to enter into the Foreign-Chinese-
Chinese indirect joint venture arrangements, which have
offered foreign companies their only opportunity to
participate in China's telecom services market. While for
the foreseeable future China is likely to remain dependent
on foreign sources for the most advanced telecom
technology, some observers worry that opportunities for
foreign participation in China's telecom markets may be
curtailed in order to strengthen the development of
domestic companies.
- Industry observers believe that the reason for
creating MII was primarily to increase the efficiency of
China's government and economy by consolidating
responsibility for information technology (IT) issues
under a single ministry and thus provide a nurturing
environment for strengthening Chinese IT companies. On
April 1, Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) told Emboffs that restructuring under
Premier Zhu aims to clarify and unify government agency
responsibilities, so that one agency, not several, would
be in charge of any particular issue.
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A significant change
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- Although the MII was formed around the relatively
conservative core of MPT and Minister Wu, it's creation
nonetheless could bring about a significant change in
China's telecom regulatory environment as the many
companies associated with the former-ministries that make
up MII are spun off into independent corporations.
Officials at China Unicom believe the reorganization will
create a fairer regulatory environment. They are
optimistic that an independent regulator, such as MII, can
solve the interconnection problems that have stymied them-
- such as the delay connecting the local China Telecom
network to the Sprint-China Unicom fixed-line network in
Tianjin, completed last July. Other observers point out
that even with an independent regulator, competition
between a former monopoly and a rival with less than two
percent market share is unlikely to be fair.
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Affiliated companies
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- Enterprises affiliated with the now defunct MPT
include: China Telecom, General Administration of Posts,
Post and Telecommunications Industry Corporation, Post and
Telecommunications Appliances Corporation,
Telecommunications Construction Corporation, China Postal
Stamp Corporation. For the time being, the University of
Post and Telecommunications will remain affiliated with
the MII. Enterprises affiliated with MEI include China
Electronic Information Industry Corporation, China
Electronics Import/Export Corporation, China Electronics
Materials Corporation, China Electronics Equipment
Corporation, China Great Wall Computer (Group)
Corporation, China Shaanxi Rainbow (Group) Corporation,
China Nanjing Zhongshan (Group) Corporation.
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Need for foreign capital
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- In addition to external factors, such as the
drying up of soft loans from Japan and Korea, several
emerging industry-specific factors may make it difficult
to obtain the capital needed for continued rapid expansion
of China's telecom networks. Telephone installation fees
have been a major source of capital for China Telecom, but
have dropped from a national average of RMB 4000 (USD 480)
to only RMB 2000 in 1997. Even at that level, recent
consumer-oriented newspaper articles have called for
abolishing this fee because it is not based on costs, but
is simply a means of raising capital for network
expansion. The popularity of cell phones and competition
from China Unicom (which charges a lower connection fee)
has also cut into installation fee receipts.
- The trend towards lower international settlement
rates and internet usage which originates in China will
mean reduced settlement revenues for China. (The U.S.
alone paid China over USD 300 million in settlements in
1996. In 1997, after receiving the FCC proposal on cost-
based settlements, China twice agreed to lower settlement
rates. Rates to consumers were also lowered.) There is
also pressure on China Telecom from alternative
communications technologies such as call-back, internet
telephony, resale of leased lines and satellite
transmissions which bypass the China Telecom controlled
international gateways (presently, still the only legal
international links) to reduce service charges, or lose
customers.
- In the past, China Telecom benefited from
preferential policies, subsidies and tax breaks.
Officials at the MPT (now MII) believe they have managed
the industry very well. The remarkable growth in
capacity, revenues and profits tend to bear them out. Some
observers believe this rosy profit picture may change
under the more competitive conditions created by China
Unicom and an independent regulator. Recent accounts of
rising consumer displeasure related to the telecom
industry include a story of a group of college students
who sued China Telecom when they discovered that their
telephone debit cards could not be used outside of the
locality where purchased. The sale of a 20 percent share
in China Telecom (Hong Kong) last year raised over USD 3
billion, but industry observers question whether such an
approach would be permitted for mainland Chinese Telecom
companies, and if it were allowed, whether it would be as
successful.
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Government downsizing: hiring opportunity for companies
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- According to MII officials, the number of jobs in
the central (Beijing) offices of the new Ministry will
drop from the current 800 (the combined total of the
employment at the merged ministries) to only 200. Most of
the employees let go will be transferred to the various
operations being separated from the ministries. Since the
absolute number of people is small and the sector rapidly
growing, there should be no difficulty for the excess
employees to find work elsewhere. Telecom industry
executives point out that there is a shortage of skilled
workers in information industries. These favorable
circumstances mean MII will probably be the first ministry
to complete re-organization.
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Plenty of job offers for qualified applicants
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- Many companies, both Chinese and foreign, appear
eager to hire laid-off government ministry employees,
especially the many MPT and MEI employees with advanced
training in technical areas. In addition to being
relatively well-educated, employees at government
ministries bring valuable knowledge of regulations and
connections to colleagues at their ministries. Recent
editions of newspapers such as the "Youth Daily" have ads
from several of the most well-known companies in China
asking laid-off government employees to send their
resumes. One company from Jiangsu Province advertised that
it was seeking former ministry employees to fill 41 senior
positions in its electronics, finance, legal and trade
departments. Legend computer and the U.S. company
Rockwell International are among the firms soliciting
resumes from ex-government employees.
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